What is Cryptocurrency? A Beginner's Guide to Digital Money

In today's digital age, the concept of money has expanded beyond physical banknotes and coins. Cryptocurrency, a form of digital money, has gained significant popularity and relevance in recent years. Digital money, as the name suggests, exists solely in electronic form and can be transferred electronically. It offers numerous advantages over traditional forms of money, including instant transactions, reduced fees on cross-borders, and increased accessibility. One crucial element in securing digital transactions is cryptography, the science of encoding and decoding information, which plays a vital role in safeguarding the integrity and security of digital money. Today, we’ll explore some basic concepts of cryptocurrency and a little touch on how it works to help you understand the novel financial innovation better than yesterday.

Demystifying Cryptocurrency

Cryptocurrency is a specific type of digital money that utilizes cryptographic techniques to secure financial transactions. It is decentralized, meaning it operates independently of any central authority, such as a government or financial institution. Additionally, it is completely distinguished from fiat currencies like the United States dollar or the British pound, excepting some coins that use USD as a reference price such as USDT and USDC.

The defining feature of cryptocurrencies is the employment of blockchain technology. A blockchain is a decentralized and transparent digital ledger that records and verifies all transactions made with a particular cryptocurrency. This technology ensures the integrity and immutability of the transaction history, making it extremely difficult for fraudulent activities to occur. Examples of popular cryptocurrencies on blockchain include Bitcoin, Ethereum, and USDT.

The Blockchain

The decentralized nature of the blockchain enables direct peer-to-peer (P2P) transactions between individuals, eliminating the need for physical wallets and bank accounts. Instead, people access their cryptocurrencies through unique crypto wallets or crypto exchanges.

While it is commonly said that crypto is "stored" in wallets, either hot or cold wallets, cryptocurrencies don't actually physically exist in these wallets or exchanges. In reality, they always reside on the blockchain. When using a crypto wallet or exchange, it holds the private keys that grant users access to their funds *on the blockchain*.

Blockchains and cryptocurrencies typically operate through two types of consensus algorithms: proof-of-work (PoW) and proof-of-stake (PoS). PoW relies on miners who dedicate specific computing machines for the process, while PoS relies on staking, where rewards are distributed to those who hold assets in designated wallets to help maintain the network. Additionally, users can also acquire currencies from brokers and store and spend them using encrypted wallets.

The first and most famous cryptocurrency is Bitcoin (PoS), which was introduced in 2009 by an individual or group known as Satoshi Nakamoto. Since then, numerous cryptocurrencies have emerged, each with its own distinct characteristics and purposes.

Similar to traditional fiat currencies, cryptocurrencies can be used as a medium of exchange. However, their applications have expanded significantly over the years, encompassing smart contracts, decentralized finance (DeFi), stores of value, governance, and non-fungible tokens (NFTs).

Again, cryptocurrencies are not tangible notes or coins; they exist solely in the digital realm. Think of them as virtual tokens whose value is determined by market forces driven by buyers and sellers.

Types of Cryptocurrencies

Cryptocurrencies are digital currencies that function as a form of currency and operate on their own blockchain networks. One example is Ether or Bitcoin, which is a cryptocurrency built on the Ethereum blockchain and Bitcoin blockchain respectively.

The term "altcoin" refers to any cryptocurrency that is not Bitcoin and is based on a blockchain. The term was created to describe cryptocurrencies that serve as alternatives to Bitcoin, and many altcoins were developed with the intention of improving upon Bitcoin in some way. Examples of altcoins include Namecoin, Peercoin, Litecoin (LTC), Ethereum, and USD Coin (USDC).

Certain cryptocurrencies, like Bitcoin, have a limited supply of coins, which helps to create demand and reinforce their perceived value. Bitcoin, for instance, has a maximum supply of 21 million coins, as determined by its creator(s).

Tokens are created on an existing blockchain platform but are distinct as programmable assets that facilitate the creation and execution of unique smart contracts. These contracts establish ownership of assets beyond the blockchain network. Tokens serve as representations of value, encompassing money, digital assets, coins, and even electricity, and can be both sent and received.

Stablecoins are tokens that are pegged to various fiat currencies or assets, such as gold. Most commonly, stablecoins are pegged one-to-one with the U.S. dollar, offering users the ability to exchange into an asset that carries the same value as a national currency. However, these stablecoins can still be transacted and stored within the cryptocurrency ecosystem.

Non-fungible tokens (NFTs) represent another category of cryptocurrency, indicating that they are unique assets that cannot be replaced. Think of it as a one-of-a-kind trading card that cannot be replicated, and swapping it for a different card would result in an entirely different asset. Conversely, for instance, Bitcoin (Sats) is fungible, meaning one unit can be exchanged for another identical unit.

However, this is not to mention Ordinals, the recent attempt to count Sats to make Bitcoin non-fungible.

When dealing with a particular asset, it is essential to understand its type and function based on your objectives. It's worth noting that not all digital assets were created exclusively for investment purposes.

Conclusion

As the world continues to embrace digital transformation, cryptocurrencies have emerged as a groundbreaking innovation in the realm of finance. By understanding the basics of money, digital currency, and the unique features of cryptocurrencies, beginners can navigate the world of cryptocurrency with greater confidence. Don’t worry if you don’t know where to look for resources. At nativ, we are ready to empower you with the knowledge needed to explore this fascinating world of digital money. And yet, your life will be even easier with our crypto savings wallet which is specifically designed for newcomers and everyone.